Private Lending Guidelines Tightening in 2022

When the Federal Reserve started to increase interest rates earlier this year, it obviously forced many private lenders to increase the interest rates they charge to real estate investors. But one of the side effects of the rate hikes is that many lenders have had to tighten their lending guidelines and reject loan requests that they may have otherwise accepted prior. Most lenders are only considering high quality deals and strong borrowers.

Examples of Tightening Guidelines

• Lenders that may have considered properties in tertiary markets are now only considering major metropolitan areas.?
• Lenders that used to accept borrowers with a 620 FICO score may not accept lower than 700.?
• For rehab projects, most lenders are only considering investors with lots of experience and high cash reserves.?
• In the past, many lenders required the investors to have successfully completed 2 rehab projects. Now that number is 10 for many lenders.?
• For ground-up construction loans, only experienced builders are being considered.?
• Although there is still an appetite for ground-up construction loans, most lenders are avoiding the land development phase.

Property Types That Lenders Are Avoiding in 2022

Vacant land has always been the least desirable asset for lenders, and it’s the first property type on the chopping block when there is uncertainty in the real estate market. The small percentage of private lenders that do lend on vacant land are likely rejecting all land loan requests at this time. In the slight chance that you do find a lender for a land deal, the maximum loan-to-value or loan-to-purchase price is likely to be around 35%.?

Another property type that many lenders won’t consider anymore is luxury homes, or any residential property that’s unique and doesn't have enough comps to determine the value.?

Surprisingly, multifamily is also being avoided by many private lenders, mainly by the lenders that tend to focus on residential investment properties. Most of the residential private lenders also lend on multifamily, but now most of them max out at 8 units instead of larger apartment buildings. There is another sector of private lending focused on larger commercial real estate bridge loans over $2MM, and those lenders are still bullish on multifamily.?

Lower Loan-to-Value

Many lenders are anticipating that property values will decline over the next 12 months, so maximum LTV’s are being reduced by 5% to 10%. For purchase loans, expect to put down more cash than was previously required. For refinance loans, you may find some lenders that are still advertising unusually high maximum LTV’s, say 75% for example. Take that with a grain of salt, because most lenders will knock down your perceived value, or the appraised value, if an appraisal is required.?

It’s hard to blame lenders for doing this. They want to lend, but they also need to protect themselves. Real estate values are falling in many parts of the country, and the market shake-up only started 6 months ago. There is a lot of uncertainty when it comes to property values while we still have rampant inflation and rising interest rates.?

Why Private Lenders are Tightening Guidelines

Whether a lender has had to tighten their guidelines or not may depend on their business model, in terms of capital. The majority of private lenders in today’s market? fund loans using their balance sheet and sell them in bulk to the secondary market. This capital ecosystem is the reason real estate investors have experienced low interest rates for private mortgages over the past 6 years.?

When interest rates increased in the second quarter of this year, the secondary market loan buyers pulled their capital away from private lending because they were able to get higher returns from other investments. Since lenders have increased their rates, a lot of the capital seems to be coming back to our space, but the secondary market buyers are being very cautious. They don’t want to buy any loans that have additional risk and push the limits of typical lending guidelines. This is the reason that the majority of private lenders are tightening their guidelines. They have to be able to sell their loans in order to recapitalize and continue lending.

There are lots of private lending companies that don’t sell their loans and use other capital sources including a mortgage fund, family offices, warehouse lines, individual investors, and others. Even though these private lenders don’t have to conform to the risk appetite of an institutional loan buyer, many of them are tightening their lending guidelines because of the uncertainty in the market and the anticipation of declining property values. Some have told me they are tightening guidelines because they are getting flooded with higher than normal loan requests, and they are in a position to be more picky about the loans they fund.

Conclusion

The Federal Reserve is not done with hiking interest rates. It could take a long time for the market to stabilize, so I’m guessing the majority of private lenders will continue to be conservative through 2023. That said, there is still a lot of capital available for high quality loans.?

If you’re seeking private financing for a commercial or residential investment property deal, use our website PrivateLenderLink.com as a resource to find direct lenders. All the private lending companies listed on the site have a very detailed profile that shows their lending guidelines. Contact each lender directly, or use our Loan Request Experience to request recommendations.

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